Euro Falls to 17-Month Low Amid French Debt Crisis Fears

The euro dropped to a 17-month low against the dollar on Monday, driven by concerns over France's budget deficit and a bond market sell-off. French government bonds faced pressure as higher policy rate expectations and political uncertainty ahead of the 2027 election raised doubts about the sustainability of France's public finances. The yield gap between French bonds and German Bunds widened to 150 basis points on Friday, the highest since 2011, before narrowing slightly to 145.50 basis points.

Analysts expressed alarm over the bond market dynamics, with Hauke Siemssen of Commerzbank noting that the sell-off in French bonds is creating a dangerous market backdrop. The euro fell to $1.1161 in Asian trading, its weakest since May 2025, and was last down 0.62% at $1.1118. This marks the euro's fourth straight weekly decline against the dollar, the steepest in about four months.

The euro's decline was further exacerbated by the Federal Reserve's September rate hike and last week's widening of French bond spreads. Traders now see a 78% chance of the Fed holding rates steady in October, up from 36% a week earlier, though they still anticipate hikes in December and early 2027. The US dollar index rose 0.39% to 102.33, nearing its highest level since April 10, 2025.

The Japanese yen gained 0.10% to 157.67, supported by government warnings against its depreciation and its safe-haven status. Prime Minister Sanae Takaichi's commitment to fiscal sustainability eased concerns about Japan's fiscal outlook. Data showed core inflation in Tokyo accelerated in September, bolstering the case for further interest rate hikes in Japan.